Climate change shocks and monetary policy in South Africa: a simulation-based analysis

This study explores the effects of climate shocks on South Africa’s macroeconomic stability and monetary policy dynamics through a simulation-based dynamic stochastic general equilibrium model. It incorporates climate variability as a key factor influencing inflation expectations, output and other macroeconomic variables. The paper examines how climate-induced disruptions such as changes in agricultural productivity, natural disasters and environmental conditions affect inflation, employment, exchange rates and interest rates over a 50-year horizon (2025–2075). The findings reveal that climate variability significantly affects inflation expectations and economic output, necessitating adaptive monetary policies that incorporate climate risks. The study underscores the importance of integrating climate considerations into macroeconomic frameworks to enhance the resilience of South Africa’s economy, emphasising policy measures such as interest rate adjustments, climate-informed inflation targeting and long-term strategic planning to mitigate climate-related economic disruptions.